22164 - Chenming LWC

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Summary of Proposed Investment

Project Number

22164

Company Name

Jiangxi Chenming Paper Co.,Ltd.

Date SPI Disclosed

Mar 30, 2004

Country

China

Industry

Agribusiness and Forestry

Projected Board Date

Jun 3, 2004

Status

Completed

Sector

Other Paper Products

Date Revised SPI Disclosed

Apr 7, 2005

Department

Regional Industry - MAS Asia & Pac

Environmental Category

A - Significant

Previous Events

Approved : Jun 10, 2004
Signed : Jun 25, 2004
Invested : Dec 3, 2004

Project Description

The project is a $487 million investment in Jiangxi Chenming a greenfield paper facility in the Changbei economic development zone, Nanchang city, China. The facility will produce 350,000 tpy of light weight coated (LWC) paper and will be built and operated by Shandong Chenming Paper Holdings (Chenming or the sponsor), the largest Chinese-owned paper company, and Shinmoorim Paper MFG Company (Shinmoorim), South Korea’s second largest coated paper producer and IFC client. The project will be implemented over an 18 month period and consist of:

- installation and operation of an LWC paper machine with an annual capacity of 350,000 metric tons per annum (tpy);
- a Bleached Thermo Mechanical Pulp (BTMP) plant with an annual capacity of 187,000 tpy;
- a De-Inked Pulp (DIP) plant with an annual capacity of 136,000 tpy;
- a co-generation power plant with a total capacity of 100 megawatts; and
- ancillary infrastructure, including wastewater treatment and port installations.

This purpose of this project is to support Chenming’s strategy of becoming a major international paper company within the next five years and it will also facilitate Shinmoorim’s expansion in China. In so doing, it will bridge a market gap in the availability of LWC paper in the Asia-Pacific region, which is a limited producer and net importer of coated paper. Given that market trends indicate an increasing demand for LWC paper, local Chinese production of this “light-weight” paper will reduce costs for end-users, especially those in advertising and print media.

Sponsor / Cost / Location

Project sponsor: Chenming is the leading Chinese-owned paper and pulp company and is headquartered in Shouguang, Shangdong province, China. The sponsor was established in 1958 as the Shandong Provincial Shouguang County General Paper Mill, and was renamed Shandong Chenming Paper Holdings Limited in 1993 when its shares were offered by the government for a public listing. The sponsor is listed on both the Shanghai (A shares) and Shenzhen (B shares) stock exchanges and its ownership structure is as follows: - international investors (42%), - the Shouguang government (31%), - employees (11%), and - domestic investors (16%). While the Shandong government is the single largest shareholder, Chenming is managed and operated independently by a professional management. Its management and organizational structure is completely separate from that of the government, and the sponsor owns its assets, trademarks and patent rights. In 2003, Chenming had an average of 16,292 full-time employees.At December 31, 2003, Chenming had consolidated total sales of $700 million, EBITDA of $185 million, operating profit of $126 million and net income of $79 million (after deduction of $ 8.7 million of minority interests). Its cash balance was $127 million and operating cash generation amounted to $47 million. In all, despite SARS, the company sustained a sound operational performance with sales increasing by 31%, operating income growing by 38% and net income by 69%. Total assets increased to $1.2 billion at year-end 2003 from $1.0 billion in 2002. The company’s equity grew to $485 million from $409 million during the same period. Chenming will hold 75% of the equity ($129 million) of the project company.Shareholders: The project company will be a foreign joint venture owned by the Sponsor, Sappi Limited of South Africa, the world’s largest producer of coated paper, Shinmoorim Paper Manufacturing Company Limited, South Korea’s second largest coated paper producer, and IFC.

Based in South Africa, Sappi is the world’s largest manufacturer and supplier of coated wood-free paper and dissolving pulp, with a total annual production capacity of 5.1 million tons of paper and 3.5 million tons of pulp. Sappi brings a high degree of operational experience to the project. Its market share in the coated wood-free paper market is 24 percent in North America, 20 percent in Europe and 60 percent in Africa. Currently, Sappi has a market share of 3 to 4 percent in Asia based solely on its exports to the region. The Project will therefore represent an important step in Sappi’s strategic objective of expanding its current market share in the Asia region.

In fiscal year 2003 (ending September 30, 2003), Sappi had net revenues of $4.3 billion and net income of $149 million.

Sappi owns and manages approximately 535,000 hectares of timberlands in Southern Africa. It employs 16,000 people mostly in North America, Europe and Southern Africa. Sappi’s shares are listed on the Johannesburg, London and Frankfurt stock exchanges, and have a secondary listing on the New York Stock Exchange.

Shinmoorim is South Korea''s second largest producer of coated paper with total capacity of 470,000 tpy and approximately 30% market share. It has 561 employees and was established in 1978 as an affiliated company (through Moorim Paper and Serim Paper) of the Moorim Group, which itself was established in 1956. The group is controlled directly or indirectly by the Dong Wook Lee Family and associates, who together own approximately 60% of the company. IFC holds an 11% stake, Emerging Markets Partnership (EMP) holds 8% and the public holds the balance. Shinmoorim is listed on the Korea Stock Exchange. Over half (52%) of Shinmoorim’s sales are local with the remaining 48% exported to over 60 countries. At December 31, 2003, Shinmoorim has net (unaudited) revenues of $339.7 million and net income of $21.3 million. Cash generation and EBITDA were $31.3 and $44.3 million respectively, indicating strong liquidity and a good cash position. Its total assets were $387.3 million and its total debt was $159.6 million. Shinmoorim will hold 12.5% of the project company’s equity, representing an investment of $21.5 million.

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	60.0
Equity	12.90

Development Impact

This project was defined as an environmental and social Category A project because following project pre-appraisal significant, adverse and sensitive environmental and social impacts were anticipated. These impacts result from resettlement associated with development of the greenfield site and emissions to air from the boiler plant required to service the 100 MWe power station. Other issues of concern were environmental management processes, emissions to water and the impact of the project on its immediate environs.

Location of environmental documents In locally affected community
The SPI is available at the following locations:

World Bank InfoShop
1818 H Street, N.W., Room J1-060
Washington, DC 20433
USA
Telephone: (202) 458-4500 (USA)
Fax: (202) 522-1500 (USA)
E-mail: pic@worldbank.org
Hours of Operation: 9:00am to 5:00pm (Monday through Friday)

IFC Beijing Office
1501, China World Tower 2
China World Trade Center
No.1, Jian Guo Men Wai Ave.
Beijing 100004, P.R. China
Telephone: 86-10-65058686

Gang Kou Village Council Office
Gang Kou
Jiao Qiao Town
Changbei Economic and Technology Development Zone
Nanchang
JiangXi Province,
China
330013

Jiao Qiao Town Council Offices
Jiao Qiao Town
Changbei Economic and Technology Development Zone
Nanchang
JiangXi Province,
China
330013

Jiangxi Environmental Protection Bureau
16, Hubin South Road
Nanchang
JiangXi Province
China
330006

IFC will play a major role in the supporting the project by

- working closely with Chenming to educate the sponsor about international financing options, corporate governance, and financial risk management. IFC has helped Chenming identify key risks such as aged receivables and excessive reliance on short-term debt, and will work will the client to optimize its capital structure,
- acting as a honest broker between Chenming and Shinmoorim, its technical partner and the project’s other international investor and
- ensuring transparency and strong corporate governance at the level of the project company by taking an equity stake. IFC’s advice will also enhance Chenming’s efforts to attain world-class operations, management and governance at the project company. IFC’s role also includes introducing Chenming to international financiers through the B Loan / parallel financing initiative, as well as providing advice related to sustainability practices, particularly with respect to the company’s plantation effort and environmental management policies. In essence, IFC will play a critical role in taking Chenming from the largest Chinese paper company to a leading and ranked player in the worldwide pulp and paper industry.

The development impact of this project will help construct a world-class LWC plant to meet the rapidly growing demand for lightweight coated paper in China. Chenming has a competitive advantage over imports due to lower transport, co-generation power, and labor costs. These advantages more than offset the higher fiber in the Chinese market. In addition, The project’s large scale and high quality technical know-how will advantage it over other local suppliers. In addition, the project will have the following benefits:

- Regional Development:

The project will result in a large-scale investment in China’s paper sector thereby resulting in increased output, productivity, employment and associated rise in income. This is especially relevant in rural areas such as Jiangxi, where there are relatively few employment options for the local population. In addition, the presence of project facility will help develop the local area around the industrial park, creating retail and other business opportunities for the surrounding community.

- Technology Transfer:

The project will receive equipment and technical advice from Metso (Finland) and Andritz (Austria), which will greatly enhance the technical know-how of the company, which will help improve standards across the local paper industry.

- Environment:

The project will greatly enhance Chenming’s environmental management system and controls beyond local requirements to achieve standardization among the Group companies and international best practices. All environmental, health, safety and quality activities will be implemented through integrated management systems at all plants to ensure that the environmental conditions are maintained and that the safety and health of the employees is protected, ultimately resulting in cost savings and improved employee morale;

- Corporate Governance:

IFC’s guidance vis-à-vis corporate governance, especially as it relates to Chenming’s financial risk management policies, will be extremely valuable to the sponsor. At present, Chenming does not adhere to the stringent financial risk mitigation policies put in place by many of the top P&P producers in the world. By supporting the project, IFC will be able to guide the sponsor on corporate governance policies that will allow it compete effectively internationally, implement standards prevalent among global P&P companies, and obtain long term financing from international investors.

Contacts

For Inquiries About the Project, Contact

Mr .Zhou Shao Hua, General Manager
Jiangxi Chenming Paper Co., Ltd
Changbei Economic Technology Development Zone,
Nanchang City, 330033
Jiangxi Province, PR China
Phone: 86-(0)13870691168

This Summary of Project Information (SPI) is prepared and distributed to the public in advance of the IFC Board of Directors' consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC's activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only. The following SPI is disclosed in accordance with IFC's Disclosure of Information Policy that went into effect September 1998.

The map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank, concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Country borders or names do not necessarily reflect the World Bank Group's official position. In some cases, available project location information is limited to the country of the project's activities. Locations are approximate.

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